Here is a naive test for a particular Gray code monotonic ordering (the binary reflected Gray code):  
// convert Gray code binary number to base 2 binary number
int Base2(byte Gray){ Gray^=Gray>>4; Gray^=Gray>>2; return Gray^=Gray>>1; }
// test if Gray codes are consecutive using "normal" base 2 numbers
boolean GraysAdjacent(byte x, byte y){ return 1 == abs(Base2(x)-Base2(y)); }
see especially this answer (best):
How to find if two numbers are consecutive numbers in gray code sequence 
coded in C as:  
int GraysTouch(byte x, byte y){ return !( (x^y ^ 1) && ( x^y ^ (y&-y)<<1 ) ); }
 //   test          x marks the spots!    (where they touch!)
for(int i=31; i>-1; --i )
  for(int j=31; j>-1; --j )
    Serial.print((String)(GraysTouch( i^i>>1, j^j>>1 )?"x":".") +
                         (GraysTouch( j^j>>1, i^i>>1 )?"X":".") + (j?"":"\n"));
How this works: ... will be explained and not the OP code because it is highly suspect (see Caveats commentary below).
A property of XOR, aka the ^ operator, is that bits that match are 0 and bits that are different are 1. 
 1^0 == 0^1 == 1
 1^1 == 0^0 == 0
Also, for a bit, 0 XOR b works as the identity function or simply b
and
1 XOR b works as the complement (no compliments please) function or ~b.
 id(x)       ==  x == x^0
 opposite(x) == ~x == x^11111111      Why eight 1's? Are eight enough?
When comparing two bit strings with XOR, bits that are different XOR as 1, otherwise the bits must match and the XOR is 0 :
     0101                  0001111001100111000
XOR  0011            XOR   0001111001100000111
    ------                ---------------------
     0110                  0000000000000111111 
This explains the x^y part of the code above.
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An aside:
n^n>>1 does a quick conversion from base 2 binary to the Gray code binary numbers used here.  
Also note how potent it is that f(a,b)=a^b^b=a is idempotent for any b!
An in place swap is then a=a^b; b=a^b; a=a^b;.
Unrolled c=a^b; d=c^b; e=c^d; ie. d=a^b^b=a; e=a^b^a=b;
----------------------------------------------------------------------
Now, by definition, for two Gray coded numbers to be adjacent or consecutive there must be one and only one bit that can change and be different.
Examples:
   Johnson
     Code
     000         000         000         000 
     001         001         001         100
     011         101         011         110
     111         111         010         010
     110         011         110         011
     100         010         111         111
                 110         101         101
                 100         100         001
                             ^^^
                       this Gray coding
                     is the one used here
Examine it carefully. 
Case 1
When the lowest order bit of consecutive numbers, x and y, for any of the Gray codes, are different, the rest must be the same! This is the definition of a Gray code. This means x^y must look like 0000...0001.  
Remember complement, the ~ function aka 1^b?  To test the last bit x^y is XOR'd with 1.
This explains the x^y ^ 1.
-------------------------------------------
Case 2
The location of the different bit in the consecutive Gray code numbers x and y is not the lowest order bit.  Look carefully at these Gray code consecutive numbers.  
 001       010       101     lower order bits all match
 011       110       111
   |        |          | <-- | mark location of lowest 1 
 010       100       010  <-- XOR's 
Interestingly, in this Gray code, when the lowest order bits match in x and y, so too does the location of the lowest order 1. 
Even more interesting is that, for consecutive numbers, the bits are always different (for this Gray code) in the next higher order bit position!
So, x^y looks like   ???...?1000...0 where 1000...0 must have at least one 0, 10 (Why?) and ???...? are the mystery bits that for consecutive Gray code numbers must be 000...0.  (Why? ie. to be consecutive x^y must look like ... )
The observation is that 
  x^y    looks like  ???...?100...0   if and only if
x and y  look  like  ???...?:10...0   
                             | <-- remember? the 1 location !!
The | location can be found by either x&-x or y&-y.  (Why? Why must the - be done using a 2's complement machine?)
However, the : location must be checked to see that it is 1 (Why?) and the ???...? are 000...0. (Why?)
So,
  x^y      looks like  ???...?100...0  and
(y&-y)<<1  looks like  000...0100...0
and this explains the x^y ^ ((y&-y)<<1) test.
-------------------------------------------------------------------
Why this works: ... is a consequence of the properties of the particular Gray code used here.  An examination and explanation is too complicated to be given here as to why this Gray code should have these properties.
----------------------------------------------------------------------
Commentary on the inadequacies of previous answers due to OP code issues. 
Caveat 1: Just to be explicit, the algorithm in the OP's question:
private static int graycode(byte term1, byte term2) {  
  byte x = (byte)(term1^term2);  // why use XOR?
  int count = 0;  
  while(x!=0)  
  {  
    x = (byte)(x &(x-1));  // why use bitwise operator?
    count++;               // what is count?
  }  
  return count == 1;  
}  
has an interesting interpretation of consecutive Gray codes. It does report correctly when any two binary sequences differ in a single bit position.  
If, by consecutive codes it is meant that the Gray codes are used to enumerate a monotonic ordering, there is a problem.  
Specifically, the code will return true for all these pairs:
000, 001 or 000, 010 or 000, 100 
so an ordering might be 001, 000, 010 but then where can 100 go?
The algorithm reports (correctly) that the "consecutiveness" of 100 with either of 001 or 010 is false.  
Thus 100 must immediately precede or follow 000 in an enumeration but cannot immediately precede or follow 001 or 010. DOH!!!
Caveat 2: Note x = (byte)(x & (x-1))  resets the lowest order 1 bit of x to zero.
refs: 
Gray code increment function
Deriving nth Gray code from the (n-1)th Gray Code
https://electronics.stackexchange.com/questions/26677/3bit-gray-counter-using-d-flip-flops-and-logic-gates
How do I find next bit to change in a Gray code in constant time?
How to find if two numbers are consecutive numbers in gray code sequence